President Alberto Fernández is exultant. With just over two months in office, he managed to ensure that the International Monetary Fund seamlessly backs up his negotiation strategy with private creditors, holders of some 100,000 million dollars in Argentine foreign debt bonds. "They accused us of populists, of irresponsible, but it turns out that yesterday [Wednesday] we woke up and the IMF proved us right. What we said was not a lie, it was true," the president said Wednesday. The Fund presented Wednesday mission report that for a week reviewed accounts and visited senior officials.The summary of the technicians was that the Argentine debt is "not sustainable" and that in order to be sustainable it needs an "appreciable take away" from the bondholders.
The IMF report was an oxygen balloon for Fernández, who since succeeding Mauricio Macri on December 10 argues that Argentina is not in a position to pay the inherited foreign debt. The main creditor is the IMF. In mid-2018, the agency granted Macri a financial rescue of 57,000 million dollars, of which he delivered 44,000 million, before the economic situation became unsustainable. The Fund's executive director, Kristalina Georgieva, has already warned that the bylaws prevent her from granting a capital withdrawal to Argentina. He supported, on the other hand, Fernández's thesis that this effort corresponds to private creditors, because the payments committed by the South American country are not compatible with the context of economic recession, high inflation and rising poverty.
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"A few months ago, during the campaign, we stated that it was impossible to live with a system that only promoted financial speculation. It was much more business to bet on letters than production. And we said that it was impossible to meet the debt. It was large in amount and we promised to pay it very quickly, something impossible, "Fernández said Thursday. The scenario was in tune with the political intentions of the president: he spoke during the inauguration of a biological laboratory plant accompanied by the former Minister of Economy Roberto Lavagna, architect of the last major debt restructuring that Argentina carried out in 2003.
The text of the Fund recognizes the seriousness of the Argentine economic crisis and even admits that there is no room for a new fiscal adjustment, a whole turn with respect to the policy it promoted when it granted the rescue to Macri. Once again, Argentina can become a testing laboratory. In a long column in the Financial Times, Georgieva said they worked to overcome the limitations of what he called a "more conventional economic thinking." "We are rethinking the way we advise emerging countries," he wrote, especially as regards the "use of the exchange market as a buffer" of "external disturbances." For the director of the IMF, this strategy "may overlook important characteristics of emerging markets that alter the response of their economies to external shocks and may require a different policy prescription," Georgieva wrote.
The depreciation of the Argentine currency has been key in the seriousness of the debt crisis it is going through. 80.3% of the assumed credits are in foreign currency and the value of the dollar against the peso has risen from 14 units in 2016 to more than 60 in 2019 (80 pesos in the black market). Even Luis Caputo, former Minister of Finance of Macri and responsible for the past management debt plan, said on Thursday that “the exchange rate policy imposed by the Fund on our country made any monetary and fiscal effort sterile to control inflation aggravated the recession and ended up restricting credit further. ”
With the Fund's report, the first political stage of the negotiation of Argentine debt was concluded. The Government should now sit at a table with private creditors and make numbers. The IMF requested an "appreciable" removal of capital and interest, but it will now be Argentina's responsibility to give it concrete numbers. The market assumes that the removal will be important and that Argentina, now backed by the Fund, will fight hard.
The reaction of the markets to the report of the Fund's technicians was not good. Argentine bonds fell between 1% and 2% and have been trading for 50% under the pair for months, that is, half of their issuance value. The percentage reflects that since the beginning of the debt crisis, in 2018, investors feared for the capital invested. Nor did Argentina accompany the country risk index prepared by JP Morgan, which rose another 85 points, to 2,138. This means that Argentina must pay for its debt in dollars 20 points more than the United States Treasury, a value that reflects that the external financing for Buenos Aires is completely closed.